U.S. Treasury’s know-your-customer proposal delayed by struggle for regulatory consensus

By Guest Contributor
September 30, 2013

By Brett Wolf, Compliance Complete

NEW YORK, Sept. 30 (Thomson Reuters Accelus) – A months-long delay in the release of a know-your-customer rule proposal that would have an impact across the financial industry is the result of the U.S. Treasury Department’s inability to reach a consensus with regulators on key details of the measure, sources familiar with the matter say.
Rob Rowe, a lawyer with the American Bankers Association’s Center for Legal and Regulatory Compliance, said “a number of bankers have asked about the status of the proposal.”

An anti-money laundering compliance officer at a large U.S. bank added: “Everyone is wondering what is taking so long.”

When contacted by Compliance Complete, spokesmen for the Treasury Department and its anti-money laundering unit, the Financial Crimes Enforcement Network (FinCEN), declined to comment on the delay.

However, former Treasury Department officials briefed on the situation told Compliance Complete that Department staff is struggling to resolve differences with regulators.

FinCEN said in February 2012 it planned to propose a customer due-diligence rule that would clarify and standardize across industries financial institutions’ obligations to know their customers.

It said that among other things, the proposal would clearly outline firms’ obligations to determine the true, or “beneficial,” owners of accounts held in the names of legal entities such as corporations.

The latter provision generated significant pushback from industry, especially in the securities sector which has traditionally done relatively little to determine beneficial ownership.

The fear is that the cost of compliance cost could be extremely high, especially if certain requirements – such as mandatory verification of the beneficial ownership information provided by customers and remediation of all existing accounts – are included.

Treasury gathered feedback from the financial services industry during five public hearings across the country and received around 90 comment letters, many of which argued against a new rule.

“We could be asked to boil the ocean to find customers doing something bad,” an anti-money laundering compliance officer told Compliance Complete.

Banking and securities industry regulators have echoed some of the concerns voiced by the firms they oversee while vetting a rule proposal drafted by Main Treasury and FinCEN, sources familiar with the matter said.

Furthermore, the banking regulators are now questioning whether the rule is even necessary because existing anti-money laundering authorities seem to meet their needs, the sources said.

For instance, a regulator pointed out that in January the Office of the Comptroller of the Currency (OCC) issued a cease-and-desist order to JPMorgan Chase Bank that required it to bolster its anti-money laundering program, including its customer due diligence practices. The requirements outlined in that order are similar to those that appear in Treasury’s draft proposal, sources said.

‘We don’t need this rule’

“The banking regulators are now turning and saying ‘We don’t need this rule,’” a former Treasury official with knowledge of the matter said on condition of anonymity. “They would rather have their examiners dictate what banks should be doing.”

In March, Treasury officials said a proposal would be released within weeks. Two months later, the point man on the rule-making effort, Chip Poncy, departed Treasury, and the Department stopped commenting publicly.

In recent months, a Department spokesman has said only that it was expected that the proposal would be made public “soon.”

James Freis, who was the director of FinCEN when Treasury began the process but has since departed and is no longer involved, said it is one of the most complex, and potentially “game-changing” rule-making endeavors ever undertaken in the anti-money laundering space.

“It’s very important to try and get this right and that needs to draw upon the expertise of a broad group of regulators to help find the right balance,” said Freis, now an attorney with the law firm Cleary Gottlieb in Washington.

But Jim Dowling, a former special agent with Internal Revenue Service – Criminal Investigation who now runs an anti-money laundering firm and tracks closely regulatory efforts, said that despite the complexity of the subject matter, the proposal’s interagency vetting process has taken “an inordinately long time.”

“The government now needs to resolve the confusion and uncertainty for all financial institutions,” Dowling said.

The ABA’s Rowe said bankers “understand that this is a complex rule and are waiting to see how FinCEN proposes resolving some of the questions that were raised during the public hearings.”

“I think most bankers accept that we’ll see a rule,” he said.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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